As you may remember from grade school, Congress controls the purse strings of government. It's a powerful job. As the size of government grows by tens of billions of dollars each year, it's a job with limitless growth potential — for those newly hired to the job.
While the not-so-dearly-departing Republican-controlled Congress has few fans, fewer still expect good things for the economy and their money from our new batch of public servants.
Unfortunately for those expecting big change, 90 percent of government is on cruise control — Social Security, Medicare, defense spending, and interest on the 8+ trillion dollar debt are at the top of the list.
You generally don't see major changes without major upheavals: war, threat to America, recession (the deeper it is, the greater the rationale is for action), growing poverty or civil unrest or boom times with surpluses. The government bureaucrats need a reason behind their major changes, in regards to the size and scope of government.
Without a reason, we need to have the same party in the White House and Congress in order to pull off big changes. One possible explanation behind the increase in government size and scope over the last few years, by supposedly fiscally responsible, small government Republicans, is the trifecta of a threat to America, recession and one party control. They simply couldn't help themselves.
Yet, the Republicans had troubles making permanent changes to big-ticket items, like Social Security reform; even the tax cuts are temporary. Factor in the lame-o continuing resolutions, and the slew of embarrassing earmarks and the fiscal report card of the old Congress becomes a gentleman's C, at best.
Democrats would likely pull similar shenanigans if the tables were turned, but unfortunately, they are not. The economy is strong, a Republican is in the White House and the public doesn't want us to do something about the threat to America so much as they want us to fix what we've been doing about the threat to America.
Such a split of power should cut down on total spending. Both parties are going to try to prove their fiscal responsibility for the next presidential election. The old new Democrats would like to get a balanced budget on some fiscal restraint and begin to tax high-income individuals (“we cut the handouts to the super rich and voila…”). Perhaps reversing some of the Bush tax cuts, with more middle class cutouts (like raising the dividend tax rate while making the first say, $1,000 in dividend income tax free). Republicans will try to prove spending restraint and lower taxes will lead to a balanced budget, by growing the economy and government revenues.
But such tinkering can influence stock and bond prices. The after tax value of municipal bonds and dividend yielding stocks to the highest tax rate individuals is important. If municipal bond income stopped being federally tax free to those with more than $1 million in net worth, municipal bond prices would fall — even if the tax change didn't apply to you directly.
Many of the other policy initiatives proposed by the new Congress are political positioning. They're not quite moving around chairs on the Titanic, but maybe repainting an old steam locomotive while others (like China) are moving on a high-speed rail.
What will matter to you and your money is not so much the result of say, banning gifts from lobbyists, but more of whether these changes will lead to Democrats securing the presidency (and more congressional seats) in the future. Then, we could see some big ticket stuff.
It may not be great for the economy in the short run, as both parties try to out, fiscally responsible for each other. You can't change the direction of a cruise ship too quickly, even a wasteful one that burns dollars in the boiler room.
The president noted in his Wall Street Journal editorial, “I believe that wealth does not come from government. It comes from the hard work of America's workers, entrepreneurs and small businesses.” Yet government spending does create jobs and wealth. Just ask contractors lapping up increased government spending. In reality, anybody who spends money — even borrowed money — creates jobs and wealth in the here and now. Government money spent is just less efficient at the job that private enterprise. If we cut spending too fast, we'll get a recession. If the government can buy us out of a recession, it can cut us into one.
Expect more rules and regulations than actual spending increases in coming years. These seem free to the government: lobbyist and earmark reform, minimum wage hikes, and drug price interventions. Of course, such plans can influence the economy, markets, and your personal income — even if Congress doesn't have to sign any checks.
Jonas Max Ferris is a regular contributor on "Cashin' In" and is co-founder of MAXfunds.com.
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